Report from the Chairman of the Board of Executive Directors
Encouraging performance in year of change
Message from the Chairman
General market perspective and key results
Following 2009, when Océ and Canon announced their intention of creating the global leader in the printing industry, 2010 was another historic year for our Company. The transaction was completed in March 2010 and since then progress was made in three key areas; cross selling, joint product development and preparing the groundwork for integration.
In 2010, it was encouraging that we were able to improve our normalized operating income in three consecutive quarters, even though our bottom line was impacted by substantial one-off items. Our profitability improved, due to better utilization of our factories and the results from our cost-savings program. 2010 was also a year during which customers continued to be cost conscious amidst ongoing economic uncertainty.
Fortunately, revenue development improved versus the trend of previous years, reflecting initial signs of recovery in some of our core markets. Favorable foreign exchange effects had an impact on 2010 total revenues, that amounted to € 2,674 million. As of the 2010 third quarter, non-recurring revenues grew for the first time in 10 quarters. This growth came primarily from a slight increase in new printer sales, specifically in the color continuous feed segment and in wide format, in the rapidly-growing display graphics market in particular
Based upon the strategic pillars of Océ - strengthening distribution power, expanding product portfolio and driving operational excellence - as well as the transaction with Canon, we achieved the following three key priorities. Business continuity was ensured, the decline in revenues was halted and normalized operating results improved. Ongoing economic uncertainty, however, impacted customer behavior as well as the performance of the SBUs in the financial year 2010.
Our cost-savings program led to higher margins and lower operational costs, resulting in 2010 normalized operating income - excluding one-off items - almost doubling to € 72 million.
These positive developments in non-recurring revenues and operating income were reinforced by our commitment to ongoing innovation. In line with past practice, we invested approximately 8% of overall revenues in research and development in 2010.
Recently launched, popular printers such as the Océ JetStream series (in the Production Printing environment) and the Océ Arizona 0 XT (in the Display Graphics Systems arena) remained important reasons why customers continued to choose Océ.
Overview of Strategic Business Units
Digital Document Systems The SBU Digital Document Systems (DDS) focused on document flow and printing management solutions for small format - maximum A3. Revenues amounted to € 1,479 million; organically, revenues declined by 3.1%. The share of color in total DDS revenues increased by 3% point. In the office segment, Océ designed its go-to-market strategy jointly with Canon.
As of mid 2010, we started selling Canon office printers through our own distribution channels, first in the US and then in Europe. By year-end 2010, we were offering Canon office printers to customers worldwide. Therefore approximately 1 00 sales and service staff throughout our European and US operating companies were trained in selling and servicing these products in a series of two-day workshops at a special Canon Camp in Venlo as well as various US regional offices.
As anticipated, the phasing in of Canon printers and phasing out of the former corresponding OEM portfolio impacted sales in this segment. On a normalized basis, higher margins and lower costs generated better results.
In the printroom environment in business, government and educational markets, we continued to address the full color and black & white requirements of print professionals. The market for very high volume black & white cutsheet production printers remained challenging. Similarly, in the graphic arts industry, transactional printing sector and direct mail markets, we supplied a range of high volume continuous feed and cutsheet printing solutions. Around the world, we provided customers with small format hardware and a full range of related services and software. These included consultancy, maintenance and financing (rental and leasing) services as well as workflow and output management software.
Sales of our very high volume continuous feed printing systems rose particularly in the color arena. Sales of our Océ JetStream and Océ ColorStream 10000 Flex printing systems increased compared to previous years. The Océ ColorStream 3500 printing system was launched successfully towards the end of the year.
Based on recent independent product placement data for the first half of the year (source: InfoTrends) Océ again led the continuous feed market with a 26% share. This percentage included inkjet and toner-based technologies in both the US and Western Europe. In 2010 sales of the Océ VarioStream 7000 series witnessed a marked recovery.
In December 2010, we announced a strategic alliance with manroland, consisting of cooperation in product development and go-to-market strategies. We contribute our knowledge of digital very high volume printing, while manroland provides access to the graphic arts market and experience in high-speed paper handling.
Wide Format Printing Systems As in previous years, revenues of the SBU Wide Format Printing Systems (WFPS) were impacted in 2010 by the challenging market circumstances in its key market segments, especially construction. Revenues amounted to € 732 million; organically, revenues declined by 0.4 %. After a slow start to the year, partially attributable to delivery issues of Océ ColorWave 600 and Océ PlotWave 300 printing systems, growth in the second half of 2010 was mainly driven by non-recurring revenue development of Display Graphic Systems.
In the second half of the year, however, non-recurring revenues in wide format printing systems and software for technical documentation grew strongly. In low- volume segments, technical documentation product placements were up 30% compared to 2009. This development was partly offset by declining recurring revenues in technical documentation and imaging supplies. The impact of this was felt particularly in the construction sector in Europe and the United States, although this decline was compensated by lower costs.
Specifically in the display graphics markets, sales surged, particularly those of the Océ Arizona 0 GT/XT and Océ CS2 00 color printing systems, introduced in early 2010. Customers perceive these systems as delivering high productivity solutions at very competitive total cost of ownership levels for applications in wide format imagery such as banners, outdoor advertising, scaffolding sheets and retail promotional material. Revenues of our broad range of imaging supplies experienced a slight decline due to decreasing click volumes in wide format printing. Revenues from small format media developed well.
Océ Business Services In 2010, Océ Business Services (OBS) revenues amounted to 463 million; organically, revenues decreased by 0.8%, the US weakening by 3. % while Europe grew by 1.2%. We continued to enable our customers to increase efficiency, reduce cost, mitigate risk and enhance operational performance by improving their critical document management processes. The development of centrally coordinated new services gradually took shape.
In the US, we prudently managed our costs, fully in line with our plan to meet the commercial challenges in the American market place. A decline in print volumes of mail services was partly offset by the growth of new services, although the richer product mix contributed to higher margins.
In Europe, OBS saw reduced activity at existing customers. A profitability drive led to the review of contracts. During the year, a pan-European OBS organization was implemented, enabling the sales companies to sharpen customer focus, expand service portfolio and improve practice and performance. OBS laid the groundwork for creating a joint back office system throughout Europe.
Overview of R&D and M&L activities
Research & Development In the months leading up to completion of the transaction with Canon in March 2010, it was clear that customers of both companies would have much to gain from the plans of the combination to coordinate activities and link R&D resources. We sustained our ongoing efforts to drive smart, open innovation by identifying the areas in which we could work closely together with Canon and other partners.
In doing so, we accelerated the development of core products in wide format, high volume cutsheet as well as toner and inkjet-based continuous feed color printing and workflow solutions. Following several Océ PRISMA design-in projects in 2010, Canon hardware will in 2011 be powered by the PRISMA software suite. We made significant progress in developing new businesses to create the first fully digital inner layer printer, based on inkjet technology for printed circuit boards. In the areas of embedded systems, nanotechnology and mechatronics, we continued to work closely with our partners within the PrintValley consortium. And we also defined the infrastructure and program of Document Services Valley, established with the help of Dutch government grants.
From the outset, there was strong enthusiasm among R&D specialists at both Océ and Canon to work together and jointly create new technologies and products, boosting the printing sales of the combination. This common understanding clearly demonstrated the corporate values, customer-oriented culture and technology-driven business model that Océ and Canon share.
In the meantime, both companies are offering more and more Canon printing systems with Océ technology and Océ printing systems with Canon technology. It is anticipated that the combination will launch major new printing systems in 2011, as a result of close cooperation between R&D specialists in both companies.
Manufacturing & Logistics The phasing out of certain OEM product categories and the phasing in of innovative Canon products impacted activity level at M&L during the year. In 2011, activity levels at M&L are anticipated to increase due to the launch of printing systems jointly developed with Canon. As Canon will also be selling our printers, activity levels are expected to rise even further. In the course of the year, M&L kicked off a program to align product quality with Canon’s quality requirements.
During the year, much attention was paid to optimization of the M&L infrastructure. Year end, we succeeded in realizing the targeted level of inventory. Further improvement is to be expected in 2011. Operating margins improved due to better utilization of the factories in Venlo and Poing and the cost-savings program.
In 2010, Océ enhanced the production processes of small format cutsheet systems by decreasing the footprint of, among others, the Océ VarioPrint 6000 series during assembly in the Venlo manufacturing plant. Special business support teams were formed to improve the alignment of research, industrialization and customer use. This enabled Océ to create additional applications, enlarging the target market for these printing systems. For example, the business support teams increased the paper flexibility of the Océ VarioPrint 6000 series, broadening its commercial appeal to an even wider range of commercial printing companies.
Also the combination of Océ and Canon enables M&L to share working methods with Canon and vice versa, which is an inspirational platform for creating new manufacturing processes at Océ.
Sustained focus on sustainability
To achieve our objective of becoming a leading printing Company in all relevant segments, it is imperative that we continue to optimize the sustainability of our products and processes. In recent years, we continuously improved our performance in our five focal areas: paper, energy, reuse, product responsibility and employer of choice. For details, reference is made to Océ’s Sustainability Report 2010, which will be available in April 2011.
In 2010, our efforts in the field of sustainability were rewarded. In the UK, we were described as a company “deserving recognition” when our international track record in making a significant contribution to improving the IT industry’s environmental performance was singled out in the Green IT Awards.
Furthermore, we stepped ahead of tough competition to be selected in September 2010 for the prestigious Ruban d’Honneur in the European Business Awards. As one of 1 ,000 entrants from 30 countries, we were ranked among the best 10 in the category “Environmental Awareness.”
In the US, our Production Printing Systems division earned the certification of an organization, Certified Green Partners, dedicated to protecting the world’s forest and natural resources. As part of the certification, we pledged to use certified paper from well-managed forests, purchase petroleum-free products and recycle paper waste for all office products.
Our transparency in sustainability was also recognized.Océ was among the Top 10 listed companies included in the Dutch Carbon Disclosure Leadership Index and Océ has been included in the Top 10 Dutch companies in the annual Transparency Benchmark.
During our annual Stakeholder Dialogue in November 2010, we invited customers, suppliers, employees and NGOs to comment on our sustainability policy and performance. The majority of participants, drawn from a representative sample of stakeholders, told us they believed the Company was “highly sustainable”. Approximately 7 % of survey respondents said they felt our five focal areas - paper, energy, reuse, product responsibility and employer of choice - were relevant, meaningful and comprehensive.
Reaching our Potential
In the summer of 2009, we embarked on a steady course towards becoming a stronger and healthier Océ. We kicked off an internal improvement initiative that we called Reaching our Potential. Initial results in 2010 included performance enhancements in various areas and geographies of our Company, which we expect will make an important contribution to our 2011 results. Alongside the financial benefits, Reaching our Potential is driving enthusiasm and motivation as employees see that there is room for improvement in our working methods and the results that are forthcoming.
In a sweeping review of our performance culture, we have determined the best way to achieve results is to stimulate end-to-end ownership. This implies the inclusion within a firm commitment to put strategy into action through good leadership and behavior throughout the management levels of our Company.
Human Resources
The developing cooperation with Canon was a major source of additional change for the Océ workforce. As hundreds of employees are involved in preparing the integration, workload has increased significantly over the last year. The completion of the offer by Canon in March also kicked off a new period of considerable change throughout the organization, creating both uncertainty and new opportunities.
A key internal objective of the combination is to provide new and enriched career opportunities for employees involved. Océ increased its efforts in 2010 to improve productivity across many areas of our Company. In particular, the sales and service force was trained to sell the Canon portfolio to customers. The workforce worldwide decreased by 98 FTEs compared to last year, reflecting the continued implementation of our cost-savings program.
Perspectives for the Océ-Canon combination
At the initial 16 November 2009 announcement, Océ and Canon clearly stated their aim of creating the overall number one presence in the printing industry. In achieving this objective, the combination worked hard in 2010 to capitalize on the excellent complementary fit in product range, channel mix, business lines, and research and development.
Since the closing of the transaction in March 2010, we have further strengthened our production printing portfolio and aim to become a leading provider in this segment in terms of quality, revenue and profitability. In office printing and business services, the combination aims to become a segment leader in the foreseeable future.
In wide format printing, Océ and Canon have reviewed the opportunities to jointly become the leading provider in the overall wide format business, while securing Océ’s market leadership in the technical document systems market.
We will be responsible worldwide for Wide Format, Commercial Printing and Business Services. Océ’s office activities will be integrated in Canon’s Office Imaging Products division.
Cooperation with Canon 2010 was remarkable for Océ as it signaled the kick-start of our cooperation with Canon. Following the joint announcement of the two companies in November 2009 to enter into a compelling combination, Canon declared the public offer for all the issued and outstanding ordinary shares of Océ unconditional on March 2010 with the closing of the transaction five days later.
Among the significant benefits of the combination was the refinancing of our multi-currency revolving credit facilities and the United States Private Placements, by
Canon Inc.
Throughout 2010, the ever-growing cooperation between Océ and Canon was managed under the auspices of a Steering Committee, comprising executive management members of both Océ N.V. and Canon Inc. This Committee developed detailed guidelines for cooperation between the companies, focusing particularly on bringing the non-financial considerations to life in daily business practice.
Meanwhile, hundreds of managers and employees from both companies were involved on a daily basis in capturing the benefits of the cooperation in teams ranging from Sales & Services, Research & Development, Manufacturing & Logistics to Information Systems, Intellectual Property and Finance & Administration.
Three key business priorities with Canon
Early 2010, we determined three priorities for the year, related to the cooperation with Canon:
In 2010, we started selling Canon products, first in the US, then in Europe and by the end of the year to our customers worldwide. In order to facilitate our sales workforce to successfully sell Canon products, we created a special Canon Camp, a two-day training and information program on Canon and its printing systems for hundreds of sales and service representatives in Europe. Previously, a similar initiative was undertaken in the United States. In addition, Canon is preparing its sales and service force to sell Océ products.
Teams of Canon and Océ research and development specialists jointly created innovative small format and wide format printing systems, benefiting from technology and expertise available throughout the combination. Our first jointly developed products will be launched in 2011.
Our first joint public appearances was at the prominent IPEX trade show, in May 2010 in Birmingham (UK). Here, we exhibited Canon production printers connected to Océ software, showing how the two companies’ leading technologies, hardware and workflow solutions could be successfully integrated. Since then, Canon and Océ customers have reacted positively to the combination and many of them have expressed interest in tailored solutions combining hardware, software and services from both companies.
We have also achieved progress with regard to preparing the integration. Across regions and functions, several teams, consisting of Canon and Océ specialists, are building the design of an integrated organization. These preparations are progressing according to plan.
In the fourth quarter of 2010, we successfully participated in Canon Expo, the company’s five-yearly open house held in September 2010 in New York and a month later in Paris. At the Tokyo Expo in November 2010, we launched the Océ ColorStream 3500, an innovative digital color continuous feed system. This very high volume inkjet printer was created and developed at Océ’s technology plant in Germany. It is enabling both Océ and Canon to serve commercial printing companies that wish to offer both analogue and digital color printing systems. We will also participate in the Canon Expo to be held in Shanghai in May 2011.